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4 Reasons California's Marijuana Growers Surprisingly Oppose Prop 64

Opposition to legalizing recreational cannabis in California is coming from an unlikely source.

The big day for Californians is less than one month away. On Nov. 8, millions of registered voters will be headed to the polls to decide whether or not Proposition 64, which would legalize recreational marijuana within the state and impose a 15% tax at the retail level on consumers, will pass or fail.

For the cannabis industry there simply is no bigger crown jewel than approval in California, which by itself represents the eighth-largest economy by GDP in the entire world. The legalization of recreational cannabis would likely bring in $1 billion in tax revenue to a state that always seems to be struggling to make ends meet, and it would more than double marijuana sales within the state to a projected $6.46 billion in 2020 from $2.76 billion in medical marijuana sales in 2015, according to cannabis market researcher New Frontier.

Support for the measure seems to be swaying in favor of its passage. A recent survey from Field Poll/Institute for Government Studies found 60% of respondents in favor of Prop 64, with only 31% opposed to it, while a similar survey from the Public Policy Institute observed that 60% favored the proposal and just 36% opposed it.

However, Prop 64 is getting opposition from what can only be described as the unlikeliest of sources: cannabis growers within the state. A recent poll from the California Growers Association of 750 cannabis farmers found that just 31% supported prop 64, with another 31% opposing it and a whopping 38% undecided.

Image source: Getty Images.

Why cannabis growers are coming out against Prop 64

There are four reasons, in particular, why marijuana growers are coming out against a measure that would legalize their product in the most lucrative market in the country.

To begin with, the environmental costs of operating a marijuana farm could be pretty substantial. Under Prop 64, regulators would be allowed to revoke state licenses for farmers who harm the environment by draining local creeks for irrigation and pouring pesticides into local water supplies. However, even if farmers are operating legally, the cost to maintain this oversight could come out to $20,000 to $100,000 per farm. That's a hefty price to pay that could put smaller growers out of business, or entice other potential growers to keep away.

Secondly, Prop 64 would allow the state of California to make "regulatory inspections" on growers, presumably to ensure they're within the environmental and production guidelines set by the state. Growers have referred to these inspections as "warrantless searches" and view them as unnecessary and a hindrance to business growth.

Third, growers are going to be required to pay a separate tax that could further eat into their operating margins. Prop 64 establishes a cultivation tax of $9.25 per ounce on flowers and $2.75 per ounce on marijuana leaves. Presumably, growers would be able to get some of these expenses back by charging higher wholesale costs, but that's not a guarantee.

Fourth, and perhaps most important, beginning in 2023 California is expected to begin selling Type 5 cultivation licenses to large businesses. Big corporations would be in much better shape to handle the high regulatory and environmental costs of cannabis farming, meaning by 2023 we may witness a decline in small cannabis-growing businesses in California. There's a fear throughout the marijuana industry (not just in California) that big business will take over, and that's something cannabis advocates want to avoid.

But big business already has its foot in the door -- whether you realize it or not. In Colorado (arguably the best current example of a marijuana-legal state, with $1 billion-plus in combined recreational and medical marijuana sales over the trailing 12-month period), big businesses have been gobbling up what few licenses have been sold. Coupled with a moratorium on the issuance of new licenses within the state, as well as the absence of a limit on the number of plants that a facility can grow, the market has been flooded with product, causing prices to plummet. While these falling prices are good for the consumer now, it seems to be more of a tactic to drive smaller businesses out of the market to preserve the long-term survival of deep-pocketed big businesses.

Image source: Getty Images.

Don't forget about the usual hurdles, either

On top of these grower concerns, California's marijuana businesses are set to face the same hurdles that have haunted the industry for decades.

For instance, just 3% of the nation's roughly 6,700 banks are willing to deal with marijuana-based businesses. Though most marijuana-legal states have workarounds for banks to provide basic banking services, such as a checking account and/or a line of credit, to marijuana businesses, most banks decline for fear of federal prosecution in the future. This means marijuana businesses are often stuck dealing solely with cash, which is both a security concern and a hindrance to expansion.

Cannabis businesses also get the short end of the stick when it comes to corporate taxation. U.S. tax code 280E disallows businesses that sell federally illegal substances, such as marijuana, from deducting normal business expenses come tax time. In other words, marijuana business are paying tax on their gross profits rather than net profits, putting them at an inherent disadvantage to nearly every other industry.

Finally, marijuana firmly remains a schedule 1 drug, according to the U.S. Drug Enforcement Agency. The DEA had an opportunity recently to review the scheduling status of marijuana, but chose to keep it unchanged based on the lack of scientific evidence that it provides a medical benefit, as well as the unknown chemistry of the plant. This stance by the DEA all but ensures that the marijuana industry's expansion will be constrained by state legislatures and the voting public in certain states.

Though California looks set to legalize recreational marijuana based on the polls, the reasoning behind growers' opposition, combined with these aforementioned inherent industry disadvantages, make cannabis an investment you'd still be smart to avoid for the time being.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Author

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest. Follow @TMFUltraLong